FEBRUARY 2014 ANNUAL REPORT

Transcription

1 FEBRUARY 2014 ANNUAL REPORT 2013

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3 ANNUAL REPORT 2013 Presented to the 81st General Meeting of Shareholders on 27 February 2014 by Governor George Provopoulos FEBRUARY 2014

4 BANK OF GREECE Address 21, E. Venizelos Avenue GR Athens Website Telephone Fax This is the English translation of the for 2013, originally published in Greek. ISSN

5 G E N E R A L C O U N C I L George Provopoulos Helen Dendrinou Louri Ioannis Papadakis Ilias Plaskovitis Chairman Governor Deputy Governor Deputy Governor Member of the Monetary Policy Council and Member Charalampos Stamatopoulos» Georgios-Spyros Tavlas*» Andreas Andreadis Member Term of office expires in 2014** Dimitrios Asimakopoulos» Term of office expires in 2014*** Evaggelos Geraniotakis» Georgios Mylonas» Term of office expires in 2014*** Christos Polyzogopoulos» Michael Chandris» Term of office expires in 2014*** Attending Panagiotis Karakousis Government Commissioner * By the Presidential Decree of 13 June 2013 published in the Government Gazette, Mr Georgios-Spyros Tavlas was appointed Member of the Monetary Policy Council, and consequently Member of the General Council, with a term of office that expires on 10 April 2020, in accordance with Article 35A of the Bank s Statute. ** The term of office of Mr Andreas Andreadis who, by decision of the General Council on 26 April 2013 (Meeting no. 5), was elected Alternate Member of the General Council to fill the vacancy left by the death of Georgios Kassimatis until the current General Meeting, in accordance with Article 22 of the Bank s Statute, expires at the current General Meeting. *** The terms of office of Mr Dimitrios Asimakopoulos, Mr Georgios Mylonas and Mr Michael Chandris, elected by the Ordinary General Meeting of Shareholders of 18 April 2011, expire at the current Ordinary General Meeting, in accordance with Article 21 of the Bank s Statute.

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7 C O N T E N T S CHAPTER Ι FINANCIAL RESULTS FOR Financial results for Bank of Greece organisation and operation 12 3 Expiry of General Council Members term of office 15 CHAPTER ΙΙ CHRONIC IMBALANCES CORRECTED IN 2013 AN EXIT FROM THE CRISIS IN 2014 POSSIBLE UNDER CERTAIN CONDITIONS 1 Indications are that 2013 was the last year of recession 17 2 The year 2013 marks a turning point, with the elimination of the twin deficits and the restoration of the economy s cost competitiveness 17 3 Structural reforms were implemented between 2010 and 2013 that had been overdue for decades 18 4 Financial stability was safeguarded by the bank of Greece with the support of the government 19 5 During the same period, major institutional changes were launched that reinforce EU economic governance 20 6 Prerequisites for the materialisation of the forecasted recovery in Financing the economic recovery 21 8 Policy to speed up restructuring of the economy and move quickly to sustainable growth 22 9 The challenges and role of the banking sector today 23 CHAPTER ΙΙΙ THE INTERNATIONAL AND THE EUROPEAN ECONOMIC ENVIRONMENT 1 Developments and prospects in the world economy and the euro area policy responses Developments over the past four years Developments in 2013 and the outlook for The economies of South-Eastern Europe 38 CHAPTER IV THE SINGLE MONETARY POLICY AND MEASURES TAKEN BY THE EUROSYSTEM 45 CHAPTER V MACROECONOMIC DEVELOPMENTS AND PROSPECTS IN GREECE 1 Economic activity: developments and prospects 54 2 Developments and prospects in the real estate market 61 3 Employment and unemployment: developments and prospects 65 4 Inflation, labour costs and profits: developments and prospects Inflation Labour costs Business profits 72 5 Competitiveness 72 6 External balance: developments and prospects Current account Capital transfers balance Financial account balance 79 7 International investment position and gross external debt 79 CHAPTER VI FISCAL DEVELOPMENTS AND PROSPECTS 1 Summary of developments and prospects 93 2 Current fiscal developments (January-December 2013) 96 3 The 2014 budget Main fiscal policy measures and institutional fiscal reforms 105 ANNEX TO CHAPTER VI TAX POLICY MEASURES 117 CHAPTER VIΙ MONEY, CREDIT AND CAPITAL MARKETS 1 Bank deposits

8 2 Bank interest rates and the cost of credit institutions refinancing by the Bank of Greece Credit aggregates The bond market The stock market Developments in the banking sector The private insurance market 139 CHAPTER VIΙΙ ENVIRONMENT, ENERGY AND CLIMATE CHANGE 1 Climate change research and public policy: international developments Scientific findings and reports over the past twelve months International policy decisions and considerations Recent data on greenhouse gas emissions in the EU and Greece ( ) and changes to the emissions trading system Latest available data on emissions Changes to the emissions trading system and their possible economic impact on Greek industry Recent Greek legislation and other measures on the environment, energy and climate change environmentally sustainable competitiveness Main legislative and administrative measures The taxation of heating oil, the smog problem and the energy efficiency of buildings New indicator of environmentally sustainable competitiveness Energy sector investment The work of the Climate Change Impacts Study Committee (CCISC) in Phase 2 of the impacts study Greek tourism and climate change: adaptation policies and a new growth strategy 154 ANNEX ANNUAL ACCOUNTS FOR THE YEAR 2013 A1 TABLES IΙI.1 IΙI.2 Key macroeconomic aggregates of the world economy 29 Key macroeconomic and banking indicators in South-Eastern European countries 40 V.1 Demand and GDP 55 V.2 Indicators of consumer demand 57 V.3 Indicators of investment demand 58 V.4 Gross value added at basic prices and GDP at market prices 59 V.5 Activity indicators in the services sector 60 V.6 Indicators of industrial activity 61 V.7 Industrial production 62 V.8 Price developments in Greece and the euro area 68 V.9 Price indicators 69 V.10 Earnings and labour costs 71 V.11 Average earnings and unit labour costs in total economy: Greece and the euro area 71 V.12 Greece: nominal and real effective exchange rate (EER) indices 73 V.13 Balance of payments 75 V.14 Transfers from the EU 78 V.15 Greece s international investment position by type of investment and sector 80 V.16 Gross external debt position (at current prices) 81 VI.1 General government and state budget balances 94 VI.2 State budget balance 97 VΙ.3 Ordinary budget revenue 98 VΙ.4 Outlays under the ordinary budget and the public investment budget 100 VI.5 State budget deficit on a cash basis 102 VI.6 Financing of the state budget cash deficit 103 VI.7 Consolidated debt of general government 104 VI.8 Decomposition of changes in the general government debt-to-gdp ratio

9 VΙΙ.1 VΙΙΙ.1 VΙΙΙ.2 CHARTS Deposits in Greece (excluding the central government and non-residents) 126 Greenhouse gas emissions and the Kyoto Protocol targets 148 Greenhouse gas emissions by source: EU-27, EU-15 and Greece 149 III.1 World economy: real GDP 25 III.2 Advanced economies: fiscal balance as a percentage of GDP 26 ΙΙΙ.3 Commodity price index 30 ΙΙΙ.4 Central bank policy rates 32 III.5 Real GDP in South-Eastern European countries 39 III.6 Bank credit to the private sector in South-Eastern European countries 39 III.7 Budget balance and public debt in South-Eastern European countries 40 ΙV.1 IV.2 Euro area: 3-month Euribor and spread between 3-month Euribor and 3-month Eurepo 46 Changes in key Eurosystem rates and the EONIA rate 47 V.1 GDP growth and the Economic Sentiment Indicator 53 V.2 Change in responsiveness to OECD recommendations 53 V.3 Business environment indicators 54 V.4 Private consumption as a percentage of GDP 55 V.5 Evolution of consumption expenditure 56 V.6 Export-import ratio for goods and services 57 V.7 Investment by type of capital goods as a percentage of total investment 57 V.8 Employment 65 V.9 Employment by sector and professional status 66 V.10 Unemployment rates 66 V.11 Distribution of the unemployed (with or without work experience) by length of job search 67 V.12 Harmonised index of consumer prices (HICP) and core inflation in Greece and the euro area 67 V.13 Evolution of CPI/PPI fuel prices and of Brent crude oil prices (in euro) 69 V.14 Developments in sea freight indices 74 V.15 Greek exports of goods, by destination 76 V.16 Sectoral breakdown of Greek exports of goods 76 V.17 Exports of goods as a percentage of GDP and developments in world export market shares 76 V.18 Exports of goods by technology content 77 V.19 Imports of goods by use 77 V.20 International investment position and its components 79 V.21 General government debt under the support mechanism (balances) 81 VI.1 VI.2 VII.1 VII.2 VII.3 VII.4 VII.5 Structural primary balance of general government 93 Net borrowing requirement of central government on a cash basis 103 Credit to non-financial corporations and households by MFIs in Greece 129 Credit to general government by domestic MFIs year Greek and German government bond yields 133 Athens Exchange: composite share price index and trading volume 134 Percentage structure of liabilities of Greek banking groups

10 VII.6 VII.7 VII.8 VII.9 BOXES III.1 III.2 III.3 Loan-to-deposit ratio of Greek commercial banks and euro area banks 136 Developments in NPL ratios per loan category 137 After-tax profits of Greek banking groups 137 Composition of regulatory capital and developments in capital adequacy of Greek commercial banks 138 The EU s Multiannual Financial Framework for and funding allocation to Greece 32 TABLE Allocation of European Structural and Investment Funds to Greece 34 Key decisions and mechanisms for addressing the crisis and paving the way to a genuine Economic and Monetary Union 36 Conclusions of the Symposium on Growth challenges and economic integration in South-Eastern Europe 41 CHART B Net profit margin in tradables and non-tradables 84 CHART C Evolution of the outwardness of the Greek economy 85 V.2 Poverty, inequality and social cohesion: trends and challenges during the crisis 87 CHART A Absolute and relative at-risk-of-poverty rates during the crisis 88 CHART B Income inequality indices during the crisis 89 CHART C Changes in relative poverty in selected groups 90 VΙ.1 Fiscal developments during the period CHART A General government deficit, primary deficit and debt 109 CHART B Tax burden 111 CHART C Decomposition of changes in the general government debt-to-gdp ratio 112 VΙ.2 The role of capital market expectations in the fiscal consolidation effort 112 VΙ.3 Independent fiscal institutions and fiscal performance 114 V.1 The crisis favours a shift of productive activities to tradable goods and services 82 CHART A Prices of tradables and non-tradables 83 VΙΙ.Ι Cheques as an instrument of trade credit in recent years 130 CHART Value of cheques (including banker s drafts) and nominal GDP

11 REPORT OF GOVERNOR GEORGE PROVOPOULOS TO THE ANNUAL GENERAL MEETING OF SHAREHOLDERS BY ORDER OF THE GENERAL COUNCIL I F I N A N C I A L R E S U L T S F O R FINANCIAL RESULTS FOR 2013 The Bank s profits in 2013 came to million, up from million in The Bank s total net income for 2013 decreased by 46.6%, while operating costs excluding provisions continued to decline for yet another year, by 10.1%. Staff costs, down by 7.1%, were a major factor in cutting operating costs. Provisions amounted to million, down from 2,342.7 million in In accordance with Article 71 of the Bank s Statute, the General Council has decided to propose to the General Meeting of Shareholders that the profits of 2013 be allocated as follows: 13.3 million, or 12% of the Bank s capital, to be distributed as dividend, with the balance ( million) to be transferred to the State. In greater detail, the Bank s income and expenses in financial year 2013 were as follows: Income The Bank s total net income from Eurosystem monetary policy operations, interest and commission fees, and other revenue from domestic and foreign operations decreased by 46.6% to 1,600.3 million, from 2,995.4 million in This decrease is mainly due to banks reduced recourse to Emergency Liquidity Assistance from the Bank of Greece, owing to the improved economic sentiment and the recapitalisation of banks. Specifically: Net interest income and income from financial operations and the reallocation of Eurosystem monetary income totalled 1,465.8 million, down by 49.3% from 2,888.9 million in The net result on financial operations came to 26.8 million, down by 39.5 million from 66.3 million in Net income from fees and commissions declined marginally to 70.2 million from 71.8 million in Income from equity shares and participating interests rose by 34.1 million to 54.2 million, from 20.1 million in Most of this increase came from higher income from the interim profit distribution of the European Central Bank for The European Central Bank (ECB), by decision of the Governing Council, made an interim profit distribution, amounting to 1,370 million, to the national central banks (NCBs) of the Eurosystem on 31 January The Bank of Greece received 38.4 million, in proportion to its share in the capital of the ECB. The remaining profit of the ECB was distributed to the NCBs on 21 February 2014, and the amount allocated to the Bank of Greece will benefit its results for Finally, other income decreased by 30.8% to 10.1 million, compared with 14.6 million in The bulk of this amount is income from operations carried out by the Printing Works Department (IETA) on behalf of the Greek State. Expenses Total expenses decreased by 1,907.6 million to million in 2013, compared with 2,676.8 million in 2012, mainly on account of reduced provisioning ( million in 2013, compared with 2,342.7 million in 2012). The decrease in total expenses was also the result of a further containment of expenditure for compensation of employees and pension benefits. Specifically: The Bank s operating costs excluding provisions (staff costs, pensions, depreciation, other costs) decreased by 33.7 million (-10.1%) to million, from million in 2012, despite a 4.3 million extraordinary expendi

12 ture on consultancy fees for the auditing of the banking system. The reduction in operating costs is primarily due to a 11.2 million decrease in staff costs (-7.1%, i.e million in 2013, compared with million in 2012). In addition, expenses for pension benefits were reduced by a significant 13.8 million (-12.3%) to 98.4 million, from million in This reflects the sustained efforts of the Bank and its staff to curtail expenses by implementing targeted measures and initiatives, such as the three-year firm-level collective agreement currently in force ( ), signed in April 2012 with the Bank of Greece Employees Union (SYTE). As a result of the general effort to rationalise the Bank s expenses, operating costs excluding provisions have been reduced by million (-31.6%) over the past four years. A significant contribution to this effect came from a reduction of 60.3 million (-29.1%) in staff costs. This year, consultancy fees for the auditing of the banking system were reduced to 4.3 million, compared with 10.3 million in Operating costs were cut despite the Bank s increased obligations in ensuring financial stability (audits, work on banks recapitalisation, etc.) and supervising private insurance, as well as its obligations arising from the economic support programme for Greece. Other administrative expenses fell to 37 million, from 40.1 million in 2012, down by 7.7%. Provisioning remained high in 2013, with the setting aside of million, bringing cumulative provisions to 6,651.8 million on High provisioning is in line with the principle of prudence followed by the ECB and NCBs of the Eurosystem. This practice aims both to strengthen the financial position of the Bank of Greece thereby enabling it to fulfil its duties in the best way possible, and to enhance its ability to address risks. 2 BANK OF GREECE ORGANISATION AND OPERATION Organisational restructuring The merger or elimination of certain units within the Bank and the reassignment of their tasks continued in 2013, with a view to achieving greater synergies, a more effective use of existing staff (reduced by 865 over the past six years), better financial supervision and monetary policy implementation, avoiding possible overlaps, as well as lower operating costs and operational risk. In particular, the Financial Operations Department, the Human Resources and Organisation Department, the Accounting Department, the Technical and Administrative Support Department and the Cash Department underwent considerable restructuring, while certain sections within the Internal Audit Department, the Department of Private Insurance Supervision and the Supervision of Credit and Related Financial Institutions Department also saw some organisational adjustments. Given the Bank s macroprudential responsibilities, it was considered necessary to assign new tasks to the Macro-prudential Policy Section of the Financial Stability Department. Furthermore, the tasks of the Credit Institution Resolution Unit which is chiefly responsible for recommending to the Resolution Measures Committee the adoption of resolution measures or the appointment of a Commissioner to credit institutions have been expanded. Finally, the role of the Bank as supervisory authority in the special liquidation proceedings of credit and supervised financial institutions led the Bank to define the scope of supervision and control and to set up a Special Liquidations Advisory Committee

13 Ethics Officer On 1 March 2013, the Bank s Administration appointed an Ethics Officer in compliance with a relevant requirement of the Bank s Code of Conduct, introduced by decision of the General Council on 1 June The Ethics Officer provides guidance to all staff on matters of business practices and professional ethics, conduct, rights and obligations. Operation of the Bank s network of regional branches Organisational restructuring aimed at streamlining the regional branch network continued in 2013, with a view to further cutting down on operating and cash distribution costs. In the year under review, the Thessaloniki Branch underwent organisational changes. Also, the operation of the Bank s Agencies in Lavrio, Siteia, Limnos and Poros was discontinued and the respective NHTO ( notes held to order ) stocks with National Bank of Greece Branches serving them were abolished. The operations of these Agencies were taken over by adjacent Bank of Greece Units. Development of Operating Regulations for the Bank s Units The regulatory framework governing the operation of the Bank s Units is updated and adapted to new requirements through the formulation of Operating Regulations, submitted for final approval to the Bank s General Council, with a view to facilitating the Units seamless operation and more efficient supervision and control. In the course of 2013, the General Council approved a total of 30 section-level Operating Regulations. Coordination of Eurosystem/ESCB-related matters and management of sensitive information In order to effectively manage the increasing Eurosystem/ESCB-related workload, new procedures were defined to coordinate the necessary actions that the Bank must take when participating in Eurosystem/ESCB tasks. An internal portal for the direct exchange of information and the cooperation among the Bank s representatives in the Eurosystem/ESCB was launched on a pilot basis. In addition, the Bank held staff training courses on the safe handling of sensitive information, with an emphasis on the relevant rules and procedures established by the Bank and the Eurosystem/ESCB and an analysis of practical guidelines for risk prevention and management. Buildings and technical works In 2013 the Technical and Administrative Support Department continued its maintenance and remodelling of the Bank s buildings and premises in Attica and other regions (branches and outlets), as part of a broader effort to improve working conditions, adapt the premises to new organisational structures, enhance the physical security of facilities and transactions, and introduce more eco-friendly solutions. In order to enhance the physical security of the Bank s buildings, the Bank s Administration decided to install a centralised, integrated, modern, reliable and expandable security system for the Bank s premises in Halandri, to be managed via an envisaged unified signal receiving centre, with state-of-the-art and upgradable software. The security of cash transfers was also enhanced in 2013, with the addition to the Bank s fleet of five new armoured vehicles. Research activities The Bank of Greece continued to take active part in ongoing research on issues pertaining to the Greek and European economy, in the context of the Eurosystem s research activities. Researchers from the Bank of Greece participated in the Household Finance and Consumption Survey, the Macroprudential Research Network and the Wage Dynamics Network,

14 which plans to conduct a survey of firms to assess the labour market response to the crisis (more information on these research networks is available at html/researcher.en.html). Bank of Greece publications in 2013 included twenty Working Papers and one issue of the Economic Bulletin. Research collaboration programmes continued, leading to the release of jointly conducted studies by experts from the Bank of Greece and from domestic and foreign academic institutions with the participation of post-graduate students from Greek universities, in areas such as product market competition, wages and labour, banking sector uncertainty models, corruption and tax evasion in Greece, macro-sector model simulation for an analysis of the crisis impact in Greece and, finally, immigration and crime. On May 2013, the Bank of Greece held a conference on The crisis in the euro area, at which Vitor Constâncio, Vice-President of the European Central Bank, was the keynote speaker. The papers presented at the conference are available on the Bank of Greece website under Special Conference Papers and will be published in a special issue of the Journal of Macroeconomics in April On 13 December 2013, the Bank of Greece, in collaboration with the European Bank for Reconstruction and Development (EBRD), organised an international symposium entitled Growth challenges and economic integration in South-Eastern Europe. The symposium focused on how economic integration can provide new drivers for sustainable growth in the region. Key speakers included Greece s Minister of Development and Competitiveness, the EBRD President, central bank governors from the region, academics and former government officials from countries of South-Eastern Europe. Other events included a conference on Greek tourism and climate change (see details below), as well as twelve seminars, lectures and research workshops with speakers from Greece and abroad, to ensure that economists from the Bank of Greece and the broader academic community remain abreast of current research developments. Centre for Culture, Research and Documentation In March 2013, a Centre for Culture, Research and Documentation, consisting of four Units (Museum and Collections; Library; Historical Archive; Research, Publications and Administrative Support), was established within the Bank. The mandate of the Centre is to serve as a hub for advancing and highlighting the role of the Bank of Greece in the country s economic, social and cultural development; its responsibilities include running the Museum and the Library, managing and curating the Bank s historical archives, managing and expanding the Bank s collections, overseeing relevant publications and research, holding exhibitions and organising cultural events, educational programmes, scientific and cultural conferences. The Museum continued to provide financial education to the public. Since opening at end- 2010, the Museum has had over 12,000 visitors, mostly from secondary schools and universities. In January 2013, the Museum inaugurated its second temporary exhibition, entitled Production 2 (Production Squared), a dual tribute to banknote and coin production and to actual forms of production, agricultural and other, depicted on banknotes and coins. Climate Change Impacts Study Committee (CCISC) In 2013, the Climate Change Impacts Study Committee (CCISC) continued its work on the development of adaptation policy proposals for addressing the impacts of climate change, with a focus on tourism, a key sector of the Greek economy with a substantial contribution to national GDP and an even greater contribution to employment. To this end, the Committee held a conference in July 2013 that brought together renowned scientists from the relevant disciplines, the heads of tourism bodies and

15 organisations, as well as the Secretary-General of the Ministry of Tourism and the Secretary- General for the Aegean and Island Policy. Material from the conference is available on the Bank s website, while the detailed conclusions of the conference and the CCISC s research will be published in a forthcoming report entitled Greek tourism and climate change: adaptation policies and a new growth strategy. 3 EXPIRY OF GENERAL COUNCIL MEMBERS TERM OF OFFICE By the Presidential Decree of 13 June 2013 published in the Government Gazette, Mr Georgios-Spyros D. Tavlas was appointed Member of the Monetary Policy Council, and consequently Member of the General Council, with a term of office that expires on 10 April 2020, in accordance with Article 35A of the Bank s Statute. The terms of office of Mr Dimitrios Asimakopoulos, Mr Georgios Mylonas and Mr Michael Chandris, elected by the Ordinary General Meeting of Shareholders of 18 April 2011, expire at the current Ordinary General Meeting, in accordance with Article 21 of the Bank s Statute. For this reason, the General Meeting will be called upon to elect new General Council Members for a three-year term in their place. In addition, the General Meeting will be called upon to elect one more General Council Member for a three-year term in the place of Mr Andreas Andreadis who, by decision of the General Council on 26 April 2013 (Meeting no. 5), was elected Alternate Member of the General Council to fill the vacancy left by the death of Georgios Kassimatis until the current General Meeting, in accordance with Article 22 of the Bank s Statute. The outgoing General Council Members are eligible for re-election

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17 I I C H R O N I C I M B A L A N C E S C O R R E C T E D I N A N E X I T F R O M T H E C R I S I S I N P O S S I B L E U N D E R C E R T A I N C O N D I T I O N S 1 INDICATIONS ARE THAT 2013 WAS THE LAST YEAR OF RECESSION At the previous General Meeting of Shareholders of the Bank of Greece in February 2013, the assessment presented was that the Greek economy would soon stabilise. At the time, our forecasts indicated that the recession would gradually ease in the course of 2013 and that positive GDP growth rates would be observed in The developments in the past year have confirmed this assessment and strengthen the forecast of recovery in More specifically, in the past twelve months: First, economic policy remained committed to the stabilisation programme. Consistent implementation of the programme boosted confidence both domestically and in the international markets: The Economic Climate Indicator rose considerably, compared with 2012 and the three previous years. The Athex Composite Share Price index was markedly higher than in 2012, reflecting enhanced confidence in the prospects of the economy and the banking system. The spread between Greek and German 10- year government bonds fell to 655 basis points at end-2013 (nearing the levels of June 2010), from 1,000 basis points at end Second, the improvement in confidence is gradually feeding through into the real economy: The Purchasing Managers Index (PMI) for industry reached a four-year high in the last months of 2013 and recently rose above the growth/contraction threshold; Net job creation improved significantly in the course of the year, as the hiring rate picked up and the layoff rate decelerated. The fall in GDP in 2013 is expected to have been considerably weaker compared both with 2012 and with projections in early Specifically, first estimates point to an annual GDP contraction of 3.7% in 2013, mainly on account of the robust performance of exports, especially tourism, and smaller declines in consumption and investment. Third, in the course of the year the risks to gradual stabilisation did not materialise. The most serious of these risks was the Cypriot crisis, which was dealt with promptly and effectively, without repercussions for confidence in the domestic banking system. Fourth, the recapitalisation of Greece s four core banks was completed successfully, and major steps were taken towards restructuring and consolidating the banking system. These changes were carried out smoothly, without impact on the safety of deposits and financial stability. This proved to be key to gradually restoring confidence and improving the overall climate. 2 THE YEAR 2013 MARKS A TURNING POINT, WITH THE ELIMINATION OF THE TWIN DEFICITS AND THE RESTORATION OF THE ECONOMY S COST COMPETITIVENESS The increasingly brighter outlook during the course of 2013 gradually led to stabilisation and permitted noticeable improvements in fiscal and macroeconomic aggregates: The first noteworthy development is the estimated achievement of a primary surplus for the first time since After a fiscal adjustment that was unprecedented by international standards, the primary balance of general government is expected to have turned into a surplus of around 0.4% of GDP in 2013, improving by roughly 11 GDP percentage points from This is a remarkable achievement, considering the severity of the recession. Second, according to provisional estimates from the Bank of Greece, the current account report

18 posted a small surplus in 2013 for the first time in Greece s post-war history. The substantial improvement in the current account balance by roughly 16% of GDP over the last five years was due to lower imports, as a result of the recession, and to increased exports, as the economy regained its cost competitiveness. Specifically, between 2010 and 2013, while imports of goods and services in nominal terms contracted by 15%, exports rose by 21%. Third, after more than two decades of almost continuous losses in international competitiveness up to 2009, by 2013 Greece had recovered all of the cost competitiveness it had lost relative to its trading partners. This was due mainly to a decline in unit labour costs throughout the economy in the context of a deep recession with a surge in unemployment, and greater labour market flexibility. Price competitiveness, by contrast, has not yet fully recovered, as inflation only started to respond to weak demand and lower labour costs during Negative inflation of -0.9% in 2013 has contributed to improving the economy s price competitiveness and supports real incomes. 3 STRUCTURAL REFORMS WERE IMPLEMENTED BETWEEN 2010 AND 2013 THAT HAD BEEN OVERDUE FOR DECADES Apart from the elimination of the economy s domestic and external macroeconomic imbalances, the period saw the launching and implementation of a number of structural reforms in labour and product markets and in public administration. Structural changes in labour and product markets In the labour market, significant structural changes were adopted, aimed at better aligning wage developments with firm performance and at enhancing labour mobility across sectors. Progress with structural reforms in goods and services markets, by contrast, was not as fast as in the labour market. Nevertheless, according to OECD estimates, Greece ranked first in responsiveness to structural reform recommendations made by the Organisation. Institutional changes to public administration The fiscal measures taken during the period , aimed for the most part at improving the budgetary balance as quickly as possible, consisted mainly of increases in direct and indirect taxes and, on the expenditure side, of cuts in wages, pensions and social benefits. Nonetheless, this period also witnessed significant institutional changes geared towards streamlining the public administration and downsizing the public sector, such as: the introduction of a single salary grid to the whole civil service and centralised wage management through a Single Payment Authority; the partial replacement through attrition of exiting or retiring civil servants; the preparation of updated organisation charts in public administration; the activation of a labour reserve mobility scheme for civil servants; the activation of a National Electronic Public Procurement System; the local government reform through the Kallikratis programme; the restructuring of state-owned enterprises and organisations; the reduction of public expenditure on health and pharmaceuticals and the rationalisation of the operation of hospitals; the merging of all health insurance funds into a single healthcare provider and the pension reform of July 2010, which have rationalised the health insurance system and will significantly reduce future pension expenditure as a percentage of GDP

19 At the same time, important new institutional reforms were implemented that lay the foundations for improved budget procedures, better control of public spending with the possibility of adjusting expenditure ceilings in line with revenue performance, the adoption of corrective measures and the preparation of medium-term fiscal plans. Despite the above-mentioned measures, several necessary reforms, such as the administrative reform and the restructuring of public entities through mergers or closure, did not progress quickly enough, thereby delaying an effective restructuring of the State and an improvement of public services. Significant efforts have also been made to upgrade the tax collection mechanism. However, despite the definite improvements, notable progress in curbing tax and contribution evasion has yet to be made. Hence, the imposition, at times, of tax increases and additional tax measures, which as a rule increase the tax burden on law-abiding taxpayers. 4 FINANCIAL STABILITY WAS SAFEGUARDED BY THE BANK OF GREECE WITH THE SUPPORT OF THE GOVERNMENT As a result of the global financial crisis of 2008 and its development into a fiscal crisis in 2009, Greek banks were cut off from international markets and, until June 2012, experienced an unprecedented outflow of deposits, both in magnitude and duration, amounting to roughly 90 billion or one third of the deposit base. In response, they resorted increasingly to short-term financing from the Eurosystem. At the height of the crisis in June 2012, total central bank financing to credit institutions came close to 140 billion. In addition, although Greek banks entered the crisis with satisfactory capital adequacy ratios, the heavy losses they suffered from 2010 onwards and especially the impact of the Private Sector Involvement (PSI) resulted in nearly all banks being faced with a capital shortage at end The recapitalisation of Greek banks thus became imperative, in order to fully protect depositors. Under these adverse circumstances, the government and the Bank of Greece took a number of decisive actions aimed at safeguarding financial stability and protecting depositors. The most important of the measures taken involved: the uninterrupted coverage of banks shortterm liquidity needs and the public s demand for cash; the securing of adequate public funds for the recapitalisation and restructuring of the Greek banking sector; the resolution of weak banks under a new legal framework; and the recapitalisation of core banks. The establishment of an appropriate resolution framework allowed for a smooth restructuring of the banking sector. By end-2013, six commercial and six cooperative banks had been resolved, either via the transfer of their healthy assets to another bank or via the setting-up of an interim credit institution. Also, following a bidding process, the assets and liabilities of Cypriot bank branches were transferred smoothly to a Greek bank. With the completion of the recapitalisation process by mid-2013, Greek banks capital adequacy ratios had been restored. The Hellenic Financial Stability Fund (HFSF) is now the largest shareholder in each of Greece s four core banks and has a buffer of over 8 billion to meet any further capital needs. Another positive development is the improvement in the quality of capital, which now consists almost exclusively of Tier 1 capital, whereas in 2008 one fifth of banks total capital was Tier 2 capital. The banking landscape today is different from that prevailing at the start of the crisis. Excess report

20 capacity has largely been eliminated, fewer but stronger banks are in operation, and the first benefits from the exploitation of synergies are already visible. The Bank of Greece, as the supervisory authority, has repeatedly argued that the size of the Greek economy and the current economic conjuncture call for fewer, but stronger banks with greater resilience to economic shocks. 5 DURING THE SAME PERIOD, MAJOR INSTITUTIONAL CHANGES WERE LAUNCHED THAT REINFORCE EU ECONOMIC GOVERNANCE The sovereign debt crisis served as a catalyst for strengthening economic governance in the EU, in general, and the euro area, in particular. Support mechanisms were created. Economic policy coordination and budgetary surveillance have been reinforced through the newly introduced European Semester, as well as with the six-pack and two-pack regulations for strengthening the Stability and Growth Pact and the Fiscal Compact that came into force in January Τhe new fiscal framework, laid down the Fiscal Compact, requires contracting Member States to adopt national fiscal rules to ensure that the annual structural government deficit does not exceed 0.5% of GDP, as well as a correction mechanism to be triggered automatically in the event of deviation from either the Medium-Term Objective (MTO) itself or the adjustment path towards it. According to the Fiscal Compact, the task of monitoring compliance with the national fiscal rules including the medium-term objective and the activation of the correction mechanism are to be assigned to independent fiscal councils. Furthermore, important decisions were taken at the EU level towards enhancing the institutional framework for financial supervision and safeguarding financial stability in the euro area. Top priority was given to the establishment of a banking union. The approval of the Single Supervisory Mechanism, scheduled to become fully operational by November 2014, as well as the European Council s agreement on a general approach to a Single Resolution Mechanism are important steps towards the completion of the banking union. In 2013, agreement was also reached on directives on deposit guarantee schemes and a framework for the recovery and resolution of credit institutions. Overall, the reinforcement of economic governance in EMU is expected to bolster stability in the euro area by enabling the early identification and correction of macroeconomic imbalances and the activation of effective crisis management mechanisms. As far as Greece is concerned, the institutional improvements to the EMU architecture will ensure that past mistakes in fiscal management are not repeated and will contribute in the long run to economic stability, while the banking union is expected to boost confidence in the banking system. 6 PREREQUISITES FOR THE MATERIALISATION OF THE FORECASTED RECOVERY IN 2014 Based on all the available data, it is reasonable to forecast that 2013 was the last year of recession. However, if this forecast is to become a reality, not only must the conditions contributing to the improved outlook remain unchanged, but they also have to be taken further. The prerequisites for this to happen are: Resolve and consistency in implementing the stabilisation programme. The positive outcomes so far leave no room for complacency or relaxation of fiscal policy. On the contrary, they call for a continuation of fiscal adjustment for maintaining and increasing primary surplus so as to ensure debt sustainability and consolidate the climate of confidence. Elimination or at least minimisation of the risks and uncertainties that might be triggered by a deterioration in the social and political climate, as a result of growing confrontation in

21 the run-up to the European and local government elections. Today, as we are near the end of a protracted recession, a national policy that will lead us safely out of the crisis and onto a path of sustainable growth is required. To be effective, such a policy calls for consensus building and compromise. Both, however, are difficult to achieve in a polarised climate, which acts only to amplify differences and thwarts the convergence of views. A prerequisite for growth is the continuation of fiscal adjustment and public sector restructuring. In this regard, top priority must be given to: ensuring consistency in the execution of the 2014 budget, thereby providing a strong signal that the fiscal adjustment is sustainable and that, combined with a return to growth, it can lead to a definitive exit from the crisis. upgrading the tax administration and the tax collection mechanism; speeding up the resolution of tax cases pending before the courts, in order to effectively combat tax evasion; enhancing the quality of public services; and evaluating the performance of public services and civil servants according to transparent and objective criteria. In the field of social security, a tighter monitoring and control of expenditure as well the curbing of contribution evasion to boost revenue are needed, so as to avoid the accumulation of arrears, especially those owed by the social security funds and the National Organisation for Health Care (EOPYY). The accumulation of arrears at the general government level and the shortfalls from target in privatisation proceeds pose downside risks to the liquidity of the economy, growth and the State s ability to meet its future financial obligations. The further enhancement of the institutional framework for the preparation, execution and monitoring of the budget with the establishment of an independent fiscal council will further ensure the sustainability of fiscal balance improvement in the post-memorandum era. 7 FINANCING THE ECONOMIC RECOVERY The shortage of financing is one of the major constraints on the economy today. This shortage, however, does not stem exclusively from the decline in bank credit. Rather, it is due to a combination of factors, many of which, predating the crisis, had shaped a growth model excessively dependent on bank lending. The banking system essentially went with the flow and responded to rising demand for credit from businesses and households. Greek businesses, on the other hand, failed to take advantage of the conditions of recurring profitability and improve their financing structure, thereby reducing their dependence on bank lending. In fact, for as long as they had access to relatively cheap money, they had no real incentive to do so. With the start of the fiscal crisis in 2009 and the deep recession that followed, both the supply and demand for credit contracted sharply. Against this backdrop, banks lending capacity was inevitably constrained, as the fiscal crisis strongly affected the credit ratings of the country and by extension of the domestic banking system. Thus, bank credit to the private sector and to businesses in particular gradually declined, causing a large number of businesses to have difficulty financing their production activities. Subsequently, the banking landscape in Greece has changed. Recapitalisation and restructuring of the banking system are gradually restoring confidence and are creating the conditions necessary for the supply of bank credit to the economy to increase over the medium term. However, several factors continue to limit new lending in the short term. report

22 The most important are the following: First, net deposit inflows, a critical determinant of banks capacity to supply credit to the economy, remain low. Second, the loan-to-deposit ratio needs to be kept at a conservative level. This ratio has risen largely because of the loss of deposits during the crisis. Third, the reliance of Greek banks on shortterm financing from the Eurosystem remains high, in contrast to other euro area countries, and must be gradually brought down to more reasonable levels. Fourth, despite the boost in confidence achieved after the recapitalisation, the accumulation of non-performing loans gives rise to concern. This accumulation makes banks reluctant to extend new credit, as it signals a high level of credit risk. Moreover, the non-servicing of loans deprives banks of income that could otherwise be recycled into new loans. Accumulating non-performing loans force banks to tie up more capital for future loan-loss provisions. The issue of problem loans to businesses and households must now be addressed in a systematic manner. Significant steps in this direction are already being taken by banks, as well as by the government. The improvement in macroeconomic aggregates, if it continues, will bolster confidence in Greece and its banking system and will pave the way to a gradual normalisation of credit expansion in the medium term. In the short term, however, the capacity for credit expansion will remain limited. This credit squeeze can be offset by companies turning to alternative sources of funds, such as internal capital generation, corporate bond markets, equity markets, private placements and other modern financing tools, as well as resources available from EU Structural Funds and the European Investment Bank. 8 POLICY TO SPEED UP RESTRUCTURING OF THE ECONOMY AND MOVE QUICKLY TO SUSTAINABLE GROWTH The main objective of policy today is the strengthening of the productive capacity of the economy so that the emerging recovery can be the start of strong growth in the years ahead. The economy is in a process of transition from a growth model that has exhausted its limits to a new model, capable of ensuring robust, sustainable growth in the future. As the Bank of Greece has repeatedly stressed, this new growth model must be based on a shift: from production of non-tradables to production of tradables; from consumption to savings and investment. Admittedly, while the old growth model was discredited suddenly and violently, the new model has yet to emerge clearly into sight. Transformation is, by its very nature, slow and painful, as it entails the elimination of obsolete activities, the emergence of new poles of attraction for capital, innovative investment, a reorientation of the banking system and cutting-edge entrepreneurship. As discussed in this year s, the restructuring of the economy towards tradables production has already begun, but remains weak, against the backdrop of recession and heightened uncertainty. Restructuring can, however, be accelerated if economic policy assigns top priority to generating the necessary conditions conducive to growth. Such a policy objective requires: Well-functioning markets for products, labour and capital. Until now, structural reforms in the product markets have lagged behind labour market reforms. Progress must therefore be stepped up in this particular area. A business environment in line with best international practices, with a low adminis

23 trative burden for businesses and an efficient public sector. The institutional shortcomings in these areas and the benefits to be gained from the adoption of best practices have been pointed out in a number of reports from international organisations. It should, finally, be noted that the benefits from the smooth functioning of the products and services markets involve the reallocation of resources not only across, but also within sectors through mergers and acquisitions. A stable tax framework, with a steady commitment to reducing the tax burden on businesses and natural persons. Declining taxation would both increase the incentive to invest and make more funds available for investment. This presupposes a broadening of the tax base through an effective curbing of tax evasion. Accelerated implementation of the privatisation programme and strengthening of the legal framework for investor protection to attract foreign investment. A shift on the part of companies to market-based financing is crucial and urgently necessary, as the main challenge at present is how to maximise available financial resources to support the recovery. The productive use of programmes for the co-financing of loans and guarantees with resources from EU Structural Funds and the European Investment Bank (EIB). The active role of the banking system in the restructuring of other sectors of the economy, with specific actions to support truly viable businesses, whether new or old, and to encourage initiatives that promote a bold sectoral restructuring. By adopting such a stance, banks could effectively foster the transition to the new growth model that Greece so urgently needs. 9 THE CHALLENGES AND ROLE OF THE BANKING SECTOR TODAY As the only sector to have been fully restructured and recapitalised, the banking system today is well-positioned to play an active role and spearhead the restructuring of the business sector. Of course, a transformation of such scope could not but have had its costs, especially for shareholders. Through this process, however, excess capacity has been largely eliminated, and the new banking system now stands on much more firmer ground, as demanded by the new growth model. It should be stressed that no other sector in Greece has undergone such or similar restructuring, although this was warranted by the unprecedented conditions generated by the economic crisis. What the banks have learned from experience can be equally valuable for businesses in other sectors and branches. The banks are therefore called upon today to make an essential contribution to the transformation of production along the lines of the new sustainable growth model. Today, the limited liquidity available should be channelled into the real economy in a way that maximises its growth potential. Bank strategy must be reoriented towards new patterns of lending and risk management. This would help avoid a recurrence of the trends of the previous decade, when credit was largely used for residential investment and consumption. This means that new credit must now go to dynamic outward-looking enterprises with favourable growth prospects. It goes without saying that in the context of such a reorientation from the banking system, it would be pointless, and even dangerous, to let weak, non-viable businesses and oversaturated sectors to continue operating as usual. Even if the scope for bank lending were theoretically large, providing liquidity to these enterprises would not help the economy grow healthily, nor would these enterprises survive in the long term. In addition, the strengthening of businesses must be pursued through mergers and acquisitions, with support from the banks involved. At the same time, the businesses themselves must also take initiatives towards restructuring and reorganisation, and take advantage of syn- report